Little incentive for China to implement Fatca

By: Risk | 11 Feb 2013

There is little incentive for Chinese authorities to sign an intergovernmental agreement (IGA) to enable China’s financial institutions to comply with Fatca, as any benefits to it from an exchange of information with US tax authorities are likely to be minimal, say consultants.

IGAs are government-to-government agreements entered into between the US and the partner country to establish a framework for foreign financial institutions to report certain account information to their local tax authorities. Once the necessary information is obtained, the partner country will transmit such information to the US Internal Revenue Service (IRS) under either existing bilateral tax treaties or tax information exchange agreements.

IGAs were established as an alternative to financial institutions signing individual agreements with the US government under Fatca to address certain privacy issues that may prevent them from passing client information directly to the IRS.

Speaking at a PwC Fatca roundtable in Hong Kong, Anthony Tong, US tax consulting leader for Greater China, said it is the US that would gain the most benefits from such an agreement – as it would be onerous for China to comply with no obvious benefit.

“Under Chinese law there are a lot of bankruptcy protection rules, so that under the current Fatca rules it would be very difficult for Chinese financial institutions to try to comply. Even if the account holders were to waive those privacy protections, there are still laws that would make it illegal to report that information to the US government. Therefore the US government has a lot of incentive to sign an IGA with the Chinese government so that the enforcement of this rule becomes viable,” he said.

The cost of compliance is also an issue for Chinese financial institutions, Tong said.

“If you were to estimate the amount of bank accounts opened in China by a US person, that would be a very small percentage. Part of the concern is how much effort needs to be spent in tracking down a potentially very small population of the accounts that the US tax authorities are interested in. Bear in mind that compliance is not a one-time effort – it is ongoing. Systems need to be able to track any changes in account as a person may become a US citizen or a green card holder later on,” Tong said.

For Fatca to be effective against tax evasion, it needs to be implemented worldwide, said Tim Clough, risk and assurance partner at PwC, at the same briefing.

“Fatca needs to be established globally and with all financial institutions, otherwise there will be arbitrage. Therefore it is in the US’s interest so sign up as many countries as possible to IGAs as it will mandate institutions in that country to comply,” Clough said.

Although China was not on a list of 50 countries the US Treasury said it was in negotiations with for signing an IGA in November last year, market sources believe that the US is actively engaging with the Asian state to come to an agreement behind the scenes.

No country in Asia has yet signed up to an IGA. Japan is in the process of finalising its agreement while Australia, New Zealand, Malaysia, Singapore, India and Korea are believed to be actively engaged with the US Treasury over this issue.

Speaking at the same briefing, PwC US tax partner Angelica Kwan said there is still some confusion surrounding IGAs.

“In Hong Kong there is a lot of misinformation about IGAs among financial institutions. Because so many countries are looking at this issue, some institutions believe that if Hong Kong signed an IGA, it would save them from having to comply with Fatca. This is not the case. While it may make Fatca easier to comply with under an IGA, it is still essentially the same framework,” she said.

Kwan said it would be prudent for jurisdictions to weigh up the pros and cons of an IGA.

“One of the results of an IGA is that a financial institution can no longer choose not to comply with Fatca. The jurisdiction signing an IGA will require under local laws that all financial institutions comply. We do not anticipate that any IGAs could significantly reduce the burden of Fatca compliance for Chinese and Hong Kong financial institutions,” she said.